Digital music markets fail to arrest industry decline

[NEWS] According to record industry reports in January, profits from music sold via digital channels are not growing fast enough to counteract the rapid decline of CD sales. While some say this heralds the end, recording executives insist that government action on piracy would level the field.

According to the Official Charts Company, another record year for digital single sales and the strong progress of the digital album market have failed to prevent the further decline of overall revenue in the recording industry.

The BPI, a recorded music trade organisation and one of the partners comprising the OCC alongside the Entertainment Retailers Association, reported that the combined number of digital and physical albums sold in the UK in 2010 fell to 119.9 million from 128.9m in 2009, a drop of 7%. This was despite the 30.6% growth of digital album sales to 21m, and was largely due to the 12.4% drop in physical album sales from 112.5m in 2009 to 98.5m in 2010.

Digital singles sales also made huge advances in 2010, growing to a record high of 161.8m, an increase of 5.9% from the previous year. The sale of digital singles represented 98.0% of overall sales of singles, with the CD format accounting for only 1.9m.

Despite the encouraging signs for the digital format, according to BPI Chief Executive Geoff Taylor, quoted in the aforementioned report, “this must be seen against the bigger picture. Despite unprecedented demand for music, and strong innovation offering consumers new ways to access music online, legal downloads are unable to offset the decline in CD sales because they are dwarfed by illegal competition”.

Meanwhile, the International Federation of the Phonographic Industry, a London-based trade group, has estimated that global revenue from the sale of digital music grew by about 6% to US$4.6 billion. This represents 29% of record companies’ trade revenue in 2010.

The IFPI Digital Music Report indicates that digital music sales in Europe rose by almost 20%, exceeding expectations. The growth of digital album sales was particularly strong in France (43%), the UK (29%) and the US (13%).

The growth can be attributed to “the way that record companies have revolutionised their business models to meet the demands of digitally literate consumers”. In other words, the increased use of subscription services and streaming, both as free advertising-supported services, and paid ‘premium’ services, as well as the promise of the nascent ‘cloud’ model, have driven profitability of digital licencing.

In 2010, there were more than 400 legal digital music services operating worldwide, many of which have achieved significant penetration in large markets. “Deezer”, the report notes, “has achieved significant reach in France, where it is used by more than 13 per cent of active internet users”.

There were also significant developments in the commercial cooperation of Internet service providers. Broadly, this has been by way of one of two possible models: a newly branded music service offered by the ISP, or a partnership between the ISP and an existing service. 2010 saw significant advances in ISP-supported services around the world, notably in Sweden, Denmark, Norway and Ireland.

But despite the encouraging signs, the industry argues, piracy remains the primary cause of the overall decline in recording revenue, and the primary obstacle to the growth of legal and profitable digital channels. The IFPI report says that despite “1000% growth” in the digital music market between 2004 and 2010, global recorded music revenues declined by 31% over the same period. Third-party studies indicate that “the vast majority of content distributed on file-sharing networks is copyright-infringing”, and that in Sweden, for example, “[d]igital music sales would be 131 per cent higher in the absence of piracy”.

The report also details the effects of piracy on other sections of the recording industry, including the fall in the signing of new artists by record labels, the drop in domestic releases, and the declining appearance of debut albums on the charts.

Simply put, illegal downloading and P2P networks must be made less appealing to the consumer. For this, say industry representatives, the complete cooperation of ISPs is once again required. Specifically, they must facilitate ‘graduated response’ schemes, in which a customer would be warned of copyright infringement a number of times. Ignored warnings would culminate in a sanction that would force an ISP to place restrictions on an offending customer’s Internet connection.

France has led the way with the introduction of HADOPI, an independent administrative body responsible for alerting copyright infringers to their illegal activity. Put to work in September 2010, new laws allow HADOPI to refer repeat offenders to the courts. The IFPI report claims that, only one month after the introduction of the scheme, third-party studies show that “53 per cent of those who had illegally downloaded stopped or cut back on their activity (29 per cent stopped and 24 per cent cut back)”.

Positive results are also reported in South Korea, a market badly affected by piracy, where a similar scheme was introduced in 2009. The UK has also introduced a graduated response system, while New Zealand is in the final stages of enactment of new laws.

A further obstacle to the growth of digital music services has been the basic quality of the services and reluctance of copyright holders to license their work to some systems. In effect, the services have struggled to meet the needs of consumers, who, for the moment, turn to unrestricted illegal services.

Despite the often-upbeat tone of releases by trade groups such as IFPI, there is genuine fear about the ability of digital music sales to keep the major record companies afloat in the future. Although the growth of digital channels is encouraging, it has been slowing at an alarming rate in recent years. The BBC reported that “while revenues grew by 25% in 2008, that figure slipped to 12% in 2009 and to just 6% in 2010”.

According to an article in the New York Times: “In each of the past two years, the rate of increase in digital revenue has approximately halved. If that trend continues, digital sales could top out at less than $5 billion this year, about a third of the overall music market but many billions of dollars short of the amount needed to replace long-gone sales of compact discs.”

Mark Mulligan, an analyst at Forrester Research, speaking to the NYT, said that “[m]usic’s first digital decade is behind us and what do we have? Not a lot of progress”. He went on to note that “[w]hat has been keeping labels afloat has been the digital story[…] If, all of a sudden, what they have been telling the market is the future turns out to be a failure, that radically changes the conversation”.